What got us spooked at yesterday’s bond auction is, in a word, the Chinese didn’t show up. We have speculated on more than one occasion what would happen if the Chinese failed to show. Well, now we know.
It gets a little worse. Insurance companies and pension funds sat this one out, too.
For the first time in the history of 30-year bond auctions, “direct bidders” bought more bonds than foreign bidders.
The “primary dealers” — the 20 megabanks that are required to submit bids in exchange for a host of special privileges with the Fed and U.S. Treasury — wound up buying 68% of yesterday’s issue.
“If we continue down this road much longer, the only buyer of U.S. debt will be the Fed. That’s the real downgrade to come. Not from the credit rating agencies, but from our foreign creditors.
“Once we have a failed Treasury auction, it will engender a vicious cycle. Debt service expense will soar, which causes out-of-control deficits. The Fed will be forced to purchase more of the debt and inflation rates become intractable, thus destroying GDP growth.”